This is a decent post by a former teaching assistant to Minsky, Eric Falkenstein. He sums up why Keynesianism is discredited:
"Economists did not abandon Keynesianism because they are capitalist dupes, rather, it was inconsistent, generated poor models of economic growth, and it neglected the micro economic factors that make all the difference between a North Korea and South Korea: free markets, property rights, decentralized incentives. A Keynesian thought he could steer the economy via two controls, the budget deficit and the Fed Funds rate, and indeed in the short run these are very powerful tools, but in the longer run, rather unimportant." - Minsky a Keynesian Sockpuppet
Viser innlegg med etiketten Socialdemocracy21stcentury. Vis alle innlegg
Viser innlegg med etiketten Socialdemocracy21stcentury. Vis alle innlegg
mandag 24. desember 2012
fredag 21. desember 2012
Austrians predicted the Housing Bubble - "Lord Keynes" lies again
The blogger Lord Keynes has attempted to show that Austrians did not predict the housing bubble, that it doesnt matter and that Post-Keynesians predicted it (better or something). In it he employs lies, fallacies and hides information from his readers.
1. Dean Baker recognized the Housing bubble (Fallacy)
That is correct, and even earlier Fred Harrison recognized the housing bubble in 1997. And he is Georgist (meaning a free-marketeer who makes an exception for land). This is fallacy because it is not a proper argument that shows why specific Austrians did not predict the bubble.
This is a fallacy that runs through the whole article, "Austrians didnt predict the housing bubble because other predicted it later or at the same time". And he also refers to these people as ordinary "Keynesians", which is a mislabeling. Minskyites are essentially Austro-Keynesian, whether their political ideology likes it or not.
Anyway, I will critique Dean Bakers analysis later.
2. Socialists recognized a Housing Bubble (Fallacy)
"Now does anyone seriously think that these correct identifications of an asset bubble in housing vindicates the Marxist theory?"
True, but the aforementioned articles linked to by Socialdemocracy21st do not show and nor do the socialist/marxist have a theory that explains how credit causes cycles, so they basically cannot account for this fact.
3. "Identifying a housing bubble after 2003 is not a prediction" (Fallacy):
"It is obvious that Austrians identifying a housing bubble from 2003–2004 onwards should not regarded as having any special predictive power. They were merely identifying an on-going phenomenon. It is, furthermore, notable that when some Austrians identified a housing bubble in the first half of 2002, so too did the Keynesian economist Dean Baker.
We must remember that any “predictions” after 2002 are not even predictions at all: they represent people identifying an existing asset bubble that was becoming worse."
By the same token then, any "predictions" by Keen, Hudson etc. are not "predictions". Furthermore, all predictions after 1997 are also just "identifying an on-going phenomenon" since Harrison had already predicted it.
Anyway this is wrong, what is being predicted is that the housing prices are unsustainable and that an oversupply of houses are building which will lead to a quick drop in housing prices, and trigger an economic recession.
The fact is that it is usually identifying an on-going phenomenon such as a bubble, that is hard to do. Which asset class is bloated ? No, formula or scientific theory exists to accurately predict this.
4. Critique of Ron Pauls predictions (Misinformation)
"
Well, the FED responded by aggressively lowering interest rates, that can postphone recessions and price bubbles from crashing. Instead of the housing market crashing, the stock market bubble collapsed, and basically Ron Paul got the timing wrong. Only the stock market bubble burst.
But here Lord Keynes is deceiving his audience, he ignores the fact that Ron Paul made several predictions on the housing bubble:
"The special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing.
Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged overinvestment in housing." - Paul, Ron, 2002. Testimony to U.S. House of Representatives
"The Federal Reserve must stop inflating the currency merely for the purpose of artificially lowering interest rates to perpetuate a financial bubble. This policy allows government and consumer debt to grow beyond sustainable levels, while undermining incentives to save. This in turn undermines capital investment while exaggerating consumption." - The Coming Category 5 Financial Hurricane, Dr. Ron Paul, September 15 2005
"The Fed tries to keep the consumer spending spree going, not through hard work and savings, but by creating artificial wealth in stock markets bubbles and housing bubbles. When these distortions run their course and are discovered, the corrections will be quite painful." - What the Price of Gold is Telling Us, Dr. Ron Paul, April 25 2006
There are almost endless quotes like this, so I will stop here.
Furthermore, Ron Paul focuses on Fannie Mae & Freddie Mac, which in themselves were the biggest bubbles of them all.
5. William Andersons predictions
He shows that Anderson talked about a mini-boom and a stock market bubble. We did have a stock market bubble and a big boom. I agree that Anderson did not pinpoint housing, even though I feel that is a hatchet requirement that "Lord Keynes" addded in.
I take issue with this statement though:
"Unfortunately, it was the deregulated financial sector that was the main cause of the 1990s and 2000s bubbles."
Unfortunately, the existence of the FED, FDIC, and a plethora of federal and state agencies that delineate rules for banks, brokers, stock exchanges etc. preclude anyone from claiming that it is "deregulated".
One can talk about changes in regulation, but not such a sector being deregulated or unregulated.
6. Recognizes correct Austrian predictions but makes bad arguments
He reviews another Ron Paul prediction (4), Gary North prediction (6) whilst not having read it, Hans Sennholz (9). He makes two arguments against these correct predictions, again that Dean Baker has also predicted it and that several of them argue there is a bubble in US treasuries.
Now US treasury rates have not risen, and Post-Keynesians(atleast MMTs and Minskyites) have pretty much staked their theory on them not rising and they did rise immensely in the crisis but have since fallen. A caveat here is that the FED has been supporting that market immensly, so when rates rise we shall see who is really right.
7. His flawed conclusion from this (Misinformation)
"When we review the various alleged Austrian “predictions” of the 2000s housing bubble most of them collapse. Of the eleven claims made, six (54%) do not even identify the housing boom, and certainly do not predict any such thing. Two (18%) identify the bubble, but after Dean Baker did (in August, 2002)."
He has not really shown this, he is simply selectively chosing an arbitrary year to cut off reading predictions.
8. What about after 2003 ? (Lie)
"The Austrians showed no great predictive power in 2003 or afterwards in identifying the bubble and the economic effects of a crash."
This is wrong, here is a list of Austrians articles predicting the housing bubble that Bezemer (himself a follower of Keen) has not even tried to review:
"Paul Kasriel(http://www.ntrs.com/library/econ_research/daily/us/dd040805.pdf /
http://www.ntrs.com/library/econ_research/weekly/us/pc033105.pdf)
Frank Shostak (Housing Bubble: Myth or Reality?) - 2003
James Grant (Un-Real Estate)
Christopher Mayer (The Housing Bubble) - 2004
Robert Wenzel (SUPER ALERT: Dramatic Slowdown In Money Supply Growth /
Government Isn't God: FDIC Sticks Banks With Bad Loans and Sticks
Borrowers With Subprime Junk / A Letter to a Friend on the Logic of Real
Estate Investing ) - 2004/2008
Eric Englund (When Will America's Housing Bubble Burst? / Monetizing Envy
and America's Housing Bubble / Houses Are Consumer Durables, Not
Investments)
Stefan Karlsson (America's Unsustainable Boom)
Thorstein Polleit (Sowing the Seeds of the Next Crisis)
Hans Sennholz (The Fed is Culpable)
Mark Thornthon (Housing: Too Good to Be True)
Robert Blumen (Fannie Mae Distorts Markets)
"
So by simply ignoring predictions Bezemer and here "Socialdemocracy21st" reaches the conclusion he wishes. But the picture he paints is even more disingenious, Keen has nowhere predicted the US housing bubble, even though he claims this himself numerous times. I show that here.
9. The claim that "Austrian Business Cycle Theory" does not explain the financial crisis (Lie)
He makes this claim thinly, first be repeating the "natural rate of interest" does not exist and that it does not deal with reckless lending by banks to buy consumer goods and mortgages.
"The Austrian Business Cycle Theory (ABCT) holds that central bank fiat money or fractional reserve banking-induced increases in credit (unbacked by commodity money) drives down the monetary rate of interest, causing it to go below the Wicksellian natural rate of interest. This causes malinvestment in capital goods sectors. However, the unique Wicksellian natural rate of interest does not exist, and is a pure fantasy (see here and here). The ABCT does not explain or deal with reckless lending by banks to people for mortgages or consumer goods, and nothing about financial or real asset bubbles, and nothing about financial crises. "
This is completely wrong, and all major books on the Austrian Business Cycle Theory deals with just these things.
1. The natural rate of interest is the term used by austrians for the interest rate, if all credit creation were backed by prior savings. Such a rate of interest does exist, if and when all loans are backed by prior saving.
I fully admit that the term carries some unfortunate neoclassical baggage, but this has been dropped in all modern expositions(basically all the ones between 1970-2012).
2. He repeats the claim he has made earlier that since Rothbard does not include inflationary credit buying consumer goods, the ABCT does not hold. But the problem is that many Austrians authors, all the way back to Hayek Prices and Production emphasizes durable consumer goods. I have debunked this claim earlier.
In fact in one of the prediction articles mentioned Eric Englund (an Austrian) emphasizes precisely the point that houses bought for consumption are durable consumer goods and not investments. Which makes them particularly bad investments.
Conclusion
Lord Keynes lies and misinforms his readers about the facts, and disingeniously ignores articles that are precise in their description of the problem.
His numbers were by using Dick Bezemers flawed study:
"So in other words eight (72%) of the eleven made accurate predictions about the bubble and crisis and were non-Austrians. The largest group (45%) were actually Heterodox Keynesians."
If one simply adds the Austrians I know of and have checked (and there are more I have not bothered to include), the numbers become slightly different:
1. Post-Keynesian/Minskyites (22 %): Baker, Godley, Keen and Sorenson.
2. Maverick neoclassical (9 %): Roubini and Shiller.
3. Austrians (68 %): Richebächer, Schiff, Paul Kasriel, Frank Shostak, James Grant, Christopher Mayer, Robert Wenzel, Eric Englund, Stefan Karlsson, Thorstein Polleit, Hans Sennholz, Mark Thornthon, Ron Paul and Robert Blumen.
4. Georgist (4,5 %): Fred Harrison, should get more brownie points for being early.
5. Austrian & Post-Keynesian(4,5 %): Janszen
Total: 22
I will count Janszen as part of both camps and thereby improving the numbers for the Post-Keynesians/Minskyites.
And I have not even removed Keen, who hasnt predicted the US housing bubble and the "Great Financial Crisis", and as I said I didnt even add all the Austrians ( such as Faber, Jim Rogers, William White, Gary Shilling etc.)
Given how Dick Bezemers study is flawed when it comes to Keen, I have not even checked and revised the numbers for these other Post-Keynesians either. It is also curious that he has ignored all academic Austrians, and only included finance analysts with a background in Austrian economics.
This picture is even more dismal when one counts the fact that all universities teach Kindleberger/Minsky view of the crisis when they teach about financial crises, and that they teach traditional Neo-Keynesian economics when they teach macro. Almost no universities(three I believe and scattered individuals) taught Austrians prior to 2009, and they made up about less than 1 % of the academic profession according to Mark Thornthon.
I am not of the opinion that one should use lies and deceit, in order to unseat wrongheaded ideas but "Socialdemocracy21st" is more than willing to do so.
1. Dean Baker recognized the Housing bubble (Fallacy)
That is correct, and even earlier Fred Harrison recognized the housing bubble in 1997. And he is Georgist (meaning a free-marketeer who makes an exception for land). This is fallacy because it is not a proper argument that shows why specific Austrians did not predict the bubble.
This is a fallacy that runs through the whole article, "Austrians didnt predict the housing bubble because other predicted it later or at the same time". And he also refers to these people as ordinary "Keynesians", which is a mislabeling. Minskyites are essentially Austro-Keynesian, whether their political ideology likes it or not.
Anyway, I will critique Dean Bakers analysis later.
2. Socialists recognized a Housing Bubble (Fallacy)
"Now does anyone seriously think that these correct identifications of an asset bubble in housing vindicates the Marxist theory?"
True, but the aforementioned articles linked to by Socialdemocracy21st do not show and nor do the socialist/marxist have a theory that explains how credit causes cycles, so they basically cannot account for this fact.
3. "Identifying a housing bubble after 2003 is not a prediction" (Fallacy):
"It is obvious that Austrians identifying a housing bubble from 2003–2004 onwards should not regarded as having any special predictive power. They were merely identifying an on-going phenomenon. It is, furthermore, notable that when some Austrians identified a housing bubble in the first half of 2002, so too did the Keynesian economist Dean Baker.
We must remember that any “predictions” after 2002 are not even predictions at all: they represent people identifying an existing asset bubble that was becoming worse."
By the same token then, any "predictions" by Keen, Hudson etc. are not "predictions". Furthermore, all predictions after 1997 are also just "identifying an on-going phenomenon" since Harrison had already predicted it.
Anyway this is wrong, what is being predicted is that the housing prices are unsustainable and that an oversupply of houses are building which will lead to a quick drop in housing prices, and trigger an economic recession.
The fact is that it is usually identifying an on-going phenomenon such as a bubble, that is hard to do. Which asset class is bloated ? No, formula or scientific theory exists to accurately predict this.
4. Critique of Ron Pauls predictions (Misinformation)
"
the housing market has been grossly distorted. We can soon expect a major downward correction in the housing industry, prompted by rising interest rates.”Yet it is obvious that Paul is here thinking of a correction of existing 2000 housing prices, not a massive 2000s bubble in real estate and a financial crisis in 2008. The word “soon” strongly suggests Paul was expecting the correction in the next year or two after 2000, as from 1999–2000 the Fed had raised the Federal Funds rate and was widely expected to raise it further in 2000, owing to the dot.com boom. This speech shows no prediction of the 2000s housing bubble."
Well, the FED responded by aggressively lowering interest rates, that can postphone recessions and price bubbles from crashing. Instead of the housing market crashing, the stock market bubble collapsed, and basically Ron Paul got the timing wrong. Only the stock market bubble burst.
But here Lord Keynes is deceiving his audience, he ignores the fact that Ron Paul made several predictions on the housing bubble:
"The special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing.
Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged overinvestment in housing." - Paul, Ron, 2002. Testimony to U.S. House of Representatives
"The Federal Reserve must stop inflating the currency merely for the purpose of artificially lowering interest rates to perpetuate a financial bubble. This policy allows government and consumer debt to grow beyond sustainable levels, while undermining incentives to save. This in turn undermines capital investment while exaggerating consumption." - The Coming Category 5 Financial Hurricane, Dr. Ron Paul, September 15 2005
"The Fed tries to keep the consumer spending spree going, not through hard work and savings, but by creating artificial wealth in stock markets bubbles and housing bubbles. When these distortions run their course and are discovered, the corrections will be quite painful." - What the Price of Gold is Telling Us, Dr. Ron Paul, April 25 2006
There are almost endless quotes like this, so I will stop here.
Furthermore, Ron Paul focuses on Fannie Mae & Freddie Mac, which in themselves were the biggest bubbles of them all.
5. William Andersons predictions
He shows that Anderson talked about a mini-boom and a stock market bubble. We did have a stock market bubble and a big boom. I agree that Anderson did not pinpoint housing, even though I feel that is a hatchet requirement that "Lord Keynes" addded in.
I take issue with this statement though:
"Unfortunately, it was the deregulated financial sector that was the main cause of the 1990s and 2000s bubbles."
Unfortunately, the existence of the FED, FDIC, and a plethora of federal and state agencies that delineate rules for banks, brokers, stock exchanges etc. preclude anyone from claiming that it is "deregulated".
One can talk about changes in regulation, but not such a sector being deregulated or unregulated.
6. Recognizes correct Austrian predictions but makes bad arguments
He reviews another Ron Paul prediction (4), Gary North prediction (6) whilst not having read it, Hans Sennholz (9). He makes two arguments against these correct predictions, again that Dean Baker has also predicted it and that several of them argue there is a bubble in US treasuries.
Now US treasury rates have not risen, and Post-Keynesians(atleast MMTs and Minskyites) have pretty much staked their theory on them not rising and they did rise immensely in the crisis but have since fallen. A caveat here is that the FED has been supporting that market immensly, so when rates rise we shall see who is really right.
7. His flawed conclusion from this (Misinformation)
"When we review the various alleged Austrian “predictions” of the 2000s housing bubble most of them collapse. Of the eleven claims made, six (54%) do not even identify the housing boom, and certainly do not predict any such thing. Two (18%) identify the bubble, but after Dean Baker did (in August, 2002)."
He has not really shown this, he is simply selectively chosing an arbitrary year to cut off reading predictions.
8. What about after 2003 ? (Lie)
"The Austrians showed no great predictive power in 2003 or afterwards in identifying the bubble and the economic effects of a crash."
This is wrong, here is a list of Austrians articles predicting the housing bubble that Bezemer (himself a follower of Keen) has not even tried to review:
"Paul Kasriel(http://www.ntrs.com/library/econ_research/daily/us/dd040805.pdf /
http://www.ntrs.com/library/econ_research/weekly/us/pc033105.pdf)
Frank Shostak (Housing Bubble: Myth or Reality?) - 2003
James Grant (Un-Real Estate)
Christopher Mayer (The Housing Bubble) - 2004
Robert Wenzel (SUPER ALERT: Dramatic Slowdown In Money Supply Growth /
Government Isn't God: FDIC Sticks Banks With Bad Loans and Sticks
Borrowers With Subprime Junk / A Letter to a Friend on the Logic of Real
Estate Investing ) - 2004/2008
Eric Englund (When Will America's Housing Bubble Burst? / Monetizing Envy
and America's Housing Bubble / Houses Are Consumer Durables, Not
Investments)
Stefan Karlsson (America's Unsustainable Boom)
Thorstein Polleit (Sowing the Seeds of the Next Crisis)
Hans Sennholz (The Fed is Culpable)
Mark Thornthon (Housing: Too Good to Be True)
Robert Blumen (Fannie Mae Distorts Markets)
"
So by simply ignoring predictions Bezemer and here "Socialdemocracy21st" reaches the conclusion he wishes. But the picture he paints is even more disingenious, Keen has nowhere predicted the US housing bubble, even though he claims this himself numerous times. I show that here.
9. The claim that "Austrian Business Cycle Theory" does not explain the financial crisis (Lie)
He makes this claim thinly, first be repeating the "natural rate of interest" does not exist and that it does not deal with reckless lending by banks to buy consumer goods and mortgages.
"The Austrian Business Cycle Theory (ABCT) holds that central bank fiat money or fractional reserve banking-induced increases in credit (unbacked by commodity money) drives down the monetary rate of interest, causing it to go below the Wicksellian natural rate of interest. This causes malinvestment in capital goods sectors. However, the unique Wicksellian natural rate of interest does not exist, and is a pure fantasy (see here and here). The ABCT does not explain or deal with reckless lending by banks to people for mortgages or consumer goods, and nothing about financial or real asset bubbles, and nothing about financial crises. "
This is completely wrong, and all major books on the Austrian Business Cycle Theory deals with just these things.
1. The natural rate of interest is the term used by austrians for the interest rate, if all credit creation were backed by prior savings. Such a rate of interest does exist, if and when all loans are backed by prior saving.
I fully admit that the term carries some unfortunate neoclassical baggage, but this has been dropped in all modern expositions(basically all the ones between 1970-2012).
2. He repeats the claim he has made earlier that since Rothbard does not include inflationary credit buying consumer goods, the ABCT does not hold. But the problem is that many Austrians authors, all the way back to Hayek Prices and Production emphasizes durable consumer goods. I have debunked this claim earlier.
In fact in one of the prediction articles mentioned Eric Englund (an Austrian) emphasizes precisely the point that houses bought for consumption are durable consumer goods and not investments. Which makes them particularly bad investments.
Conclusion
Lord Keynes lies and misinforms his readers about the facts, and disingeniously ignores articles that are precise in their description of the problem.
His numbers were by using Dick Bezemers flawed study:
"So in other words eight (72%) of the eleven made accurate predictions about the bubble and crisis and were non-Austrians. The largest group (45%) were actually Heterodox Keynesians."
If one simply adds the Austrians I know of and have checked (and there are more I have not bothered to include), the numbers become slightly different:
1. Post-Keynesian/Minskyites (22 %): Baker, Godley, Keen and Sorenson.
2. Maverick neoclassical (9 %): Roubini and Shiller.
3. Austrians (68 %): Richebächer, Schiff, Paul Kasriel, Frank Shostak, James Grant, Christopher Mayer, Robert Wenzel, Eric Englund, Stefan Karlsson, Thorstein Polleit, Hans Sennholz, Mark Thornthon, Ron Paul and Robert Blumen.
4. Georgist (4,5 %): Fred Harrison, should get more brownie points for being early.
5. Austrian & Post-Keynesian(4,5 %): Janszen
Total: 22
I will count Janszen as part of both camps and thereby improving the numbers for the Post-Keynesians/Minskyites.
And I have not even removed Keen, who hasnt predicted the US housing bubble and the "Great Financial Crisis", and as I said I didnt even add all the Austrians ( such as Faber, Jim Rogers, William White, Gary Shilling etc.)
Given how Dick Bezemers study is flawed when it comes to Keen, I have not even checked and revised the numbers for these other Post-Keynesians either. It is also curious that he has ignored all academic Austrians, and only included finance analysts with a background in Austrian economics.
This picture is even more dismal when one counts the fact that all universities teach Kindleberger/Minsky view of the crisis when they teach about financial crises, and that they teach traditional Neo-Keynesian economics when they teach macro. Almost no universities(three I believe and scattered individuals) taught Austrians prior to 2009, and they made up about less than 1 % of the academic profession according to Mark Thornthon.
I am not of the opinion that one should use lies and deceit, in order to unseat wrongheaded ideas but "Socialdemocracy21st" is more than willing to do so.
Did Keen predict the US housing bubble ? - Dick Bezemers flawed study
I believe that Keens model of the business cycle is basically correct (though some of his interpretation is wrong) and that is simply because it is a rehashing of the Austrian Business Cycle Theory in Keynesian language.
So it doesnt matter to me whether Keen has accurately forecast the global financial crisis or not, if his view of the cycle is correct (and it basically is correct with some caveat to that).
But the dishonest blogger "Lord Keynes"/"Socialdemocracy21st" has made a blog input(several in fact), which I demolish completely here, claiming that Austrians did not in fact predict the housing bubble. Instead he selectively quotes articles until 2003 and when they do predict it properly he simply dismisses them.
But more importantly here, he uses Dick Bezemers study (a post-keynesian) to prove that Keen predicted the US housing bubble and worldwide financial crisis more correct or better or something like that. Similiarly does Unlearningecon, another post-keynesian blogger. But this claim is wrong.
Keen has never predicted the US housing bubble (EDIT: Unlearningecon has pointed me to his debtwatch reports and in april 2007 he starts showing graphs of US debt levels and even though he does not "predict" anything specific, I will accept this is an indication that he was showing that the US would have private credit contraction, but the Bezemer study is still flawed). He has predicted an Australian housing bubble in the article Dick Bezemer refers to. Here is the name: "The lily & the pond".
Here is what Dick Bezemer quotes from him:
"Long before we manage to reverse the current rise in debt, the economy
will be in a recession. On current data, we may already be in one.” (2006)" - Stephen Keen
But here Keen is talking about Australia, and that has not happened yet (5 years, soon 6). His "aggregate demand+change in debt" model has failed to predict accurately. According to post-keynesian methodology this makes the model, unscientific.
I have asked Dick Bezemer whether he has analyzed the following Austrian articles which predict a housing bubble and financial crisis:
"Paul Kasriel
He has not responded yet.
Keen also repeatedly uses this study(in his book[1], website and journal article), and has nothing else to show to (EDIT: He can show to his theory and his graphs of US debts as indications that he understands the problem, but if kept to the same standard "Socialdemocracy21st" holds Austrians to, he hasnt in fact predicted anything correctly).
[1] Debunking Economics, 2011.
So it doesnt matter to me whether Keen has accurately forecast the global financial crisis or not, if his view of the cycle is correct (and it basically is correct with some caveat to that).
But the dishonest blogger "Lord Keynes"/"Socialdemocracy21st" has made a blog input(several in fact), which I demolish completely here, claiming that Austrians did not in fact predict the housing bubble. Instead he selectively quotes articles until 2003 and when they do predict it properly he simply dismisses them.
But more importantly here, he uses Dick Bezemers study (a post-keynesian) to prove that Keen predicted the US housing bubble and worldwide financial crisis more correct or better or something like that. Similiarly does Unlearningecon, another post-keynesian blogger. But this claim is wrong.
Keen has never predicted the US housing bubble (EDIT: Unlearningecon has pointed me to his debtwatch reports and in april 2007 he starts showing graphs of US debt levels and even though he does not "predict" anything specific, I will accept this is an indication that he was showing that the US would have private credit contraction, but the Bezemer study is still flawed). He has predicted an Australian housing bubble in the article Dick Bezemer refers to. Here is the name: "The lily & the pond".
Here is what Dick Bezemer quotes from him:
"Long before we manage to reverse the current rise in debt, the economy
will be in a recession. On current data, we may already be in one.” (2006)" - Stephen Keen
But here Keen is talking about Australia, and that has not happened yet (5 years, soon 6). His "aggregate demand+change in debt" model has failed to predict accurately. According to post-keynesian methodology this makes the model, unscientific.
I have asked Dick Bezemer whether he has analyzed the following Austrian articles which predict a housing bubble and financial crisis:
"Paul Kasriel
(http://www.ntrs.com/library/econ_research/daily/us/dd040805.pdf / http://www.ntrs.com/library/econ_research/weekly/us/pc033105.pdf) Frank Shostak (Housing Bubble: Myth or Reality?) - 2003 James Grant (Un-Real Estate) Christopher Mayer (The Housing Bubble) - 2004 Robert Wenzel (SUPER ALERT: Dramatic Slowdown In Money Supply Growth / Government Isn't God: FDIC Sticks Banks With Bad Loans and Sticks Borrowers With Subprime Junk / A Letter to a Friend on the Logic of Real Estate Investing ) - 2004/2008 Eric Englund (When Will America's Housing Bubble Burst? / Monetizing Envy and America's Housing Bubble / Houses Are Consumer Durables, Not Investments) Stefan Karlsson (America's Unsustainable Boom) Thorstein Polleit (Sowing the Seeds of the Next Crisis) Hans Sennholz (The Fed is Culpable) Mark Thornthon (Housing: Too Good to Be True) Robert Blumen (Fannie Mae Distorts Markets)"
He has not responded yet.
Keen also repeatedly uses this study(in his book[1], website and journal article), and has nothing else to show to (EDIT: He can show to his theory and his graphs of US debts as indications that he understands the problem, but if kept to the same standard "Socialdemocracy21st" holds Austrians to, he hasnt in fact predicted anything correctly).
[1] Debunking Economics, 2011.
Why was Hayek given the Nobel Prize ?
Socialdemocracy21st has another baseless, pretty much mudslinging blogpost claiming that Hayek "didnt" deserve the prize".
He claims two things:
1) That ABCT developed by Hayek is completely wrong (even though basically a watered down version is the Minsky business cycle theory, only 50 years late)
"It is astonishing that one of the two main reasons given for Hayek’s Nobel Memorial Prize was his business cycle theory: for this was precisely that part of his research program that was a clear failure. Hayek never succeeded in creating a monetary theory of the trade cycle that evaded the serious criticisms his opponents levelled against it, which included the non-existence of the Wicksellian natural rate of interest, the role of subjective expectations, and the questionable role of general equilibrium theory in his theory. "
These claims are endlessly recycled on this webpage, so I thought I might critique them shortly.
1) The wicksellian natural rate is simply a representation for what would be the interest rate if no unbacked credit creation took place, or more easily understood if all monies were a commodity.
The fact that there exist no 1 interest rate, does not concern this.
Neither does the fact that futures prices differ, as that has to do with the demand and supply schedules for each product (grains, shares etc.). No "futures" market existed for gold under the gold standard, and gold was the common medium of exchange. Interest rates in a pure gold standard, is thereby the "natural rate".
I admit that the notion of a natural rate as inaccurate modern expositions of the theory, but it does not take away from the essence of the theory.
2) Subjective expectations is not really a useful term. All action is foreward looking, and all goals are subjective. This is basic Austrian ideas, and thereby all actions regarding saving, investment and spending are ALWAYS foreword looking.
3) General equilibrium is used, unfortunately in Hayeks exposition. But that is in Prices and Production, when he was a visiting professor in England trying to teach neoclassically trained economists the Austrian Business Cycle Theory.
Furthermore, he is trying to show how the slump is what is experienced in trying to go from one point, boom phase, to another point, the bust.
The Economic Settings of 1973-74
In over 40 years, the Keynesians led by men like Kaldor, Hansen, Samuelson and Lerner had taught the world that credit expansion was positive as long as one "controlled" price-inflation.
Furthermore they had vigirously attacked the gold and proposed exchanging it for the government paper money. Their Frankenstein was the supposedly "eternal" Bretton Woods System.
After Nixon closed the gold window to avoid devaluation or honest default, largely as a necessity for his upcoming reelection, the world was led precisely into a pure fiat money system. Nixon, had also in the heat of the moment imposed price controls which was mainly advocated by Keynesians and Marxists.
The resulting social chaos made it seem the world was on the verge of breakdown. Furthermore, the enormous boost given to credit expansion and resulting price inflation that the economy contracted and had quickly resulted in a worldwide financial crash in a classical Austrian fashion.
Most Keynesian economists had their models of public control of employment etc. completely shattered and there seemed to be an opening for wheening of the socialist economics of John Maynard Keynes.
The Professor of Economics at Lund University, Ingemar Ståhl, was well-versed in Wicksellian theory and Hayekian business cycle theory. He sat on the board of Nobel Prize in Economic Science and believed he needed to get the Austrian perspective into circulation. Therefore he pushed for and achieved a consensus to award him the prize, given that the worldwide crisis illustrated clearly the correctness of Austrian Business Cycle Theory.
Added: Paul Samuelson also seems to confirm my story:
"Hayek was the seventh to receive the Bank of Sweden’s new Nobel Prize in economics. In my judgment his was a worthy choice. And yet in the 1974 senior common rooms of Harvard and MIT, the majority of the inhabitants there seemed not to even know the name of this new laureate. (By contrast, the following year when I was in Stockholm to celebrate the 75th anniversary of the original five Nobel Prizes, it was my vague impression that the Royal Swedish Academy electors paid greater deference to Hayek than to their own native son Myrdal."
Philip Plikington(supposedly a journalist) and Socialdemocracy launch straight into an attack on Hayek, trying to make him out as a political hack. But in fact it was Myrdal who was the political hack, necessary to avoid the Swedish socialist authorities vicious attacks on a "reactionary"(marxist term for anyone opposing socialism). Because in fact it was very dangerous to be a free-marketeer pre-1980 carriere wise, alot more than being a marxist professor in the US.
Conclusion
Hayek was awarded the prize, because his (ABCT) perspective on the causes of the cycle was shown to be spectacularly correct and because the Keynesian framework was shown to be spectacularly incorrect.
He claims two things:
1) That ABCT developed by Hayek is completely wrong (even though basically a watered down version is the Minsky business cycle theory, only 50 years late)
"It is astonishing that one of the two main reasons given for Hayek’s Nobel Memorial Prize was his business cycle theory: for this was precisely that part of his research program that was a clear failure. Hayek never succeeded in creating a monetary theory of the trade cycle that evaded the serious criticisms his opponents levelled against it, which included the non-existence of the Wicksellian natural rate of interest, the role of subjective expectations, and the questionable role of general equilibrium theory in his theory. "
These claims are endlessly recycled on this webpage, so I thought I might critique them shortly.
1) The wicksellian natural rate is simply a representation for what would be the interest rate if no unbacked credit creation took place, or more easily understood if all monies were a commodity.
The fact that there exist no 1 interest rate, does not concern this.
Neither does the fact that futures prices differ, as that has to do with the demand and supply schedules for each product (grains, shares etc.). No "futures" market existed for gold under the gold standard, and gold was the common medium of exchange. Interest rates in a pure gold standard, is thereby the "natural rate".
I admit that the notion of a natural rate as inaccurate modern expositions of the theory, but it does not take away from the essence of the theory.
2) Subjective expectations is not really a useful term. All action is foreward looking, and all goals are subjective. This is basic Austrian ideas, and thereby all actions regarding saving, investment and spending are ALWAYS foreword looking.
3) General equilibrium is used, unfortunately in Hayeks exposition. But that is in Prices and Production, when he was a visiting professor in England trying to teach neoclassically trained economists the Austrian Business Cycle Theory.
Furthermore, he is trying to show how the slump is what is experienced in trying to go from one point, boom phase, to another point, the bust.
The Economic Settings of 1973-74
In over 40 years, the Keynesians led by men like Kaldor, Hansen, Samuelson and Lerner had taught the world that credit expansion was positive as long as one "controlled" price-inflation.
Furthermore they had vigirously attacked the gold and proposed exchanging it for the government paper money. Their Frankenstein was the supposedly "eternal" Bretton Woods System.
After Nixon closed the gold window to avoid devaluation or honest default, largely as a necessity for his upcoming reelection, the world was led precisely into a pure fiat money system. Nixon, had also in the heat of the moment imposed price controls which was mainly advocated by Keynesians and Marxists.
The resulting social chaos made it seem the world was on the verge of breakdown. Furthermore, the enormous boost given to credit expansion and resulting price inflation that the economy contracted and had quickly resulted in a worldwide financial crash in a classical Austrian fashion.
Most Keynesian economists had their models of public control of employment etc. completely shattered and there seemed to be an opening for wheening of the socialist economics of John Maynard Keynes.
The Professor of Economics at Lund University, Ingemar Ståhl, was well-versed in Wicksellian theory and Hayekian business cycle theory. He sat on the board of Nobel Prize in Economic Science and believed he needed to get the Austrian perspective into circulation. Therefore he pushed for and achieved a consensus to award him the prize, given that the worldwide crisis illustrated clearly the correctness of Austrian Business Cycle Theory.
Added: Paul Samuelson also seems to confirm my story:
"Hayek was the seventh to receive the Bank of Sweden’s new Nobel Prize in economics. In my judgment his was a worthy choice. And yet in the 1974 senior common rooms of Harvard and MIT, the majority of the inhabitants there seemed not to even know the name of this new laureate. (By contrast, the following year when I was in Stockholm to celebrate the 75th anniversary of the original five Nobel Prizes, it was my vague impression that the Royal Swedish Academy electors paid greater deference to Hayek than to their own native son Myrdal."
Philip Plikington(supposedly a journalist) and Socialdemocracy launch straight into an attack on Hayek, trying to make him out as a political hack. But in fact it was Myrdal who was the political hack, necessary to avoid the Swedish socialist authorities vicious attacks on a "reactionary"(marxist term for anyone opposing socialism). Because in fact it was very dangerous to be a free-marketeer pre-1980 carriere wise, alot more than being a marxist professor in the US.
Conclusion
Hayek was awarded the prize, because his (ABCT) perspective on the causes of the cycle was shown to be spectacularly correct and because the Keynesian framework was shown to be spectacularly incorrect.
onsdag 14. november 2012
More nonsense on ABCT by Lord Keynes
In a blogpost, the enthusiast for the current social order "Lord Keynes" makes a bold statement. He claims that the Austrian Business Cycle Theory which states that excessive credit creation leads to overconsumption and mailinvestment does not explain the 2007-2009 financial crisis.
Here is the most important of the summary:
"After this, Rothbard (2004 [1962]: 996–1004) expounds ABCT in its usual form. But his footnote has profound significance: “[to] the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur.” In other words, the mechanisms causing recession or depression as postulated by his version of ABCT did not occur if the money is mainly loaned to consumers! ABCT assumes that newly created credit money is mainly loaned out to businesses (causing malinvestments in capital goods), and not to consumers to a significant degree."
This view of spending on consumer spending has been held by some Austrians. But most Austrians, even dating back to Hayeks formulation have not formulated in this way. The most updated and comprehensive forumlation of Austrian Business Cycle Theory has been done by Jesus Huerta de Soto in his 1997 book "Money, Bank Credit and Economic Cycles" and he addresses this very point several time.
Let me add a quote to show the jist of his reasoning:
"It is first necessary to point out that most consumer credit is extended by banks to households for the purchase of durable consumer goods. We have already established that durable consumer goods are actually true capital goods which permit the rendering of direct consumer services over a very prolonged period of time. Therefore from an economic standpoint, the granting of loans to finance durable consumer goods is indistinguishable from the direct granting of loans to the capital-intensive stages furthest from consumption. In fact an easing of credit terms and a decline in interest rates will provoke, among other effects, an increase in the quantity, quality and duration of socalled “durable consumer goods,” which will simultaneously require a widening and lengthening of the productive stages involved, especially those furthest from consumption." - page 406
He also quotes confirmation from Hayeks "Prices and Production" and Machlups "Stock Market, Credit and Capital Formation" to illustrate what earlier Austrians have claimed.
Another lie and misinformation Lord Keynes debunked, I will surely return with more :)
Here is the most important of the summary:
"After this, Rothbard (2004 [1962]: 996–1004) expounds ABCT in its usual form. But his footnote has profound significance: “[to] the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur.” In other words, the mechanisms causing recession or depression as postulated by his version of ABCT did not occur if the money is mainly loaned to consumers! ABCT assumes that newly created credit money is mainly loaned out to businesses (causing malinvestments in capital goods), and not to consumers to a significant degree."
This view of spending on consumer spending has been held by some Austrians. But most Austrians, even dating back to Hayeks formulation have not formulated in this way. The most updated and comprehensive forumlation of Austrian Business Cycle Theory has been done by Jesus Huerta de Soto in his 1997 book "Money, Bank Credit and Economic Cycles" and he addresses this very point several time.
Let me add a quote to show the jist of his reasoning:
"It is first necessary to point out that most consumer credit is extended by banks to households for the purchase of durable consumer goods. We have already established that durable consumer goods are actually true capital goods which permit the rendering of direct consumer services over a very prolonged period of time. Therefore from an economic standpoint, the granting of loans to finance durable consumer goods is indistinguishable from the direct granting of loans to the capital-intensive stages furthest from consumption. In fact an easing of credit terms and a decline in interest rates will provoke, among other effects, an increase in the quantity, quality and duration of socalled “durable consumer goods,” which will simultaneously require a widening and lengthening of the productive stages involved, especially those furthest from consumption." - page 406
He also quotes confirmation from Hayeks "Prices and Production" and Machlups "Stock Market, Credit and Capital Formation" to illustrate what earlier Austrians have claimed.
Another lie and misinformation Lord Keynes debunked, I will surely return with more :)
lørdag 10. november 2012
Did Mises & Hayek Not Predict the Great Depression ?
First there is this entry: Mises Did Not Predict the US Stock Crash of 1929 - 30. May 2011
He talks down on people, and starts by calling things myths without investigating.
He then gives a quote from Skousen book on the history of economic thought, even though most austrians regard it as a poor book and there are other direct sources that relates to this issue. This is a very typical, and pathetic style the blogger "Lord Keynes" has.
The quote:
"“As his assistant in the university seminar which met every Wednesday afternoon, I [i.e., Fritz Machlup] usually accompanied him home. On these walks we would pass through a passage of the Kreditanstalt in Vienna [one of the largest banks in Europe]. From 1924, every Wednesday afternoon as we walked through the passage for pedestrians he said: ‘That will be a big smash.’ Mind you, this was from 1924 onwards; yet in 1931, when the crash finally came, I still held some shares of the Kreditanstalt, which of course had become completely worthless” … In the summer of 1929, Mises was offered a high position at the Kreditanstalt bank. His future wife, Margit, was ecstatic, but Lu surprised her when he decided against it. ‘Why not’ she asked. His response shocked her: ‘A great crash is coming, and I don’t want my name in any way connected with it’ … (Skousen 2009: 295–296)."
Lord Keynes take on this is:
"this prediction of the failure ofone Austrian bank is transformed into the prediction of US stock market crash in 1929. Mises is alleged to have warned his future wife that “a great crash” was coming, but I have seen no evidence to suggest he was referring to America or a global depression, or anything other than the Kreditanstalt bank with that statement. "
That is surely a bizarre interpretation. He claimed a big crash was coming, not in any sense for only that bank. Additionally, given that Kreditanstalt was among the biggest banks in all of Europe and given the cycle theory that he had established and he was teaching his students, it is not hard to see this statements in its proper context. But Lord Keynes has an agenda to not see this.
Furthermore, these allegations are even more unfounded as the Federal Reserve policy was explicitly critiqued in his book from 1913, The Theory of Money And Credit. And later in other essays were he dealt with Irving Fisher "dollar stabilization" policy and his claim that it would eliminate the business cycle.
Here is Mises conclusion, in 1913 when speculating upon the Fisher plan and what should instead be done:
"It has gradually become recognized as a fundamental principle of monetary policy that intervention must be avoided as far as possible. Fiduciary media are scarcely different in nature from money; a supply of them affects the market in the same way as a supply of money proper; variations in their quantity influence the objective exchange value of money in just the same way as do variations in the quantity of money proper. Hence, they should logically be subjected to the same principles that have been established with regard to money proper; the same attempts should be made in their case as well to eliminate as far as possible human influence on the exchange ratio between money and other economic goods. The possibility of causing temporary fluctuations in the exchange ratios between goods of higher and of lower orders by the issue of fiduciary media, and the pernicious consequences connected with a divergence between the natural and money rates of interest, are circumstances leading to the same conclusion."
Now tell me "Lord Keynes", is this not what "Minskyites" would recommend to eliminate crisies, the curbing of credit creation ? Well, Mises knew this in 1913, accept it.
BTW Irving Fisher is one of the chief founders of the crude version of macroeconomics passed off as science by all variations of keynesians and neo-classicals, and even the nonsensical index-number is still used by Post-Keynesians such as Steve Keen.
I will update this.
He talks down on people, and starts by calling things myths without investigating.
He then gives a quote from Skousen book on the history of economic thought, even though most austrians regard it as a poor book and there are other direct sources that relates to this issue. This is a very typical, and pathetic style the blogger "Lord Keynes" has.
The quote:
"“As his assistant in the university seminar which met every Wednesday afternoon, I [i.e., Fritz Machlup] usually accompanied him home. On these walks we would pass through a passage of the Kreditanstalt in Vienna [one of the largest banks in Europe]. From 1924, every Wednesday afternoon as we walked through the passage for pedestrians he said: ‘That will be a big smash.’ Mind you, this was from 1924 onwards; yet in 1931, when the crash finally came, I still held some shares of the Kreditanstalt, which of course had become completely worthless” … In the summer of 1929, Mises was offered a high position at the Kreditanstalt bank. His future wife, Margit, was ecstatic, but Lu surprised her when he decided against it. ‘Why not’ she asked. His response shocked her: ‘A great crash is coming, and I don’t want my name in any way connected with it’ … (Skousen 2009: 295–296)."
Lord Keynes take on this is:
"this prediction of the failure ofone Austrian bank is transformed into the prediction of US stock market crash in 1929. Mises is alleged to have warned his future wife that “a great crash” was coming, but I have seen no evidence to suggest he was referring to America or a global depression, or anything other than the Kreditanstalt bank with that statement. "
That is surely a bizarre interpretation. He claimed a big crash was coming, not in any sense for only that bank. Additionally, given that Kreditanstalt was among the biggest banks in all of Europe and given the cycle theory that he had established and he was teaching his students, it is not hard to see this statements in its proper context. But Lord Keynes has an agenda to not see this.
Furthermore, these allegations are even more unfounded as the Federal Reserve policy was explicitly critiqued in his book from 1913, The Theory of Money And Credit. And later in other essays were he dealt with Irving Fisher "dollar stabilization" policy and his claim that it would eliminate the business cycle.
Here is Mises conclusion, in 1913 when speculating upon the Fisher plan and what should instead be done:
"It has gradually become recognized as a fundamental principle of monetary policy that intervention must be avoided as far as possible. Fiduciary media are scarcely different in nature from money; a supply of them affects the market in the same way as a supply of money proper; variations in their quantity influence the objective exchange value of money in just the same way as do variations in the quantity of money proper. Hence, they should logically be subjected to the same principles that have been established with regard to money proper; the same attempts should be made in their case as well to eliminate as far as possible human influence on the exchange ratio between money and other economic goods. The possibility of causing temporary fluctuations in the exchange ratios between goods of higher and of lower orders by the issue of fiduciary media, and the pernicious consequences connected with a divergence between the natural and money rates of interest, are circumstances leading to the same conclusion."
Now tell me "Lord Keynes", is this not what "Minskyites" would recommend to eliminate crisies, the curbing of credit creation ? Well, Mises knew this in 1913, accept it.
BTW Irving Fisher is one of the chief founders of the crude version of macroeconomics passed off as science by all variations of keynesians and neo-classicals, and even the nonsensical index-number is still used by Post-Keynesians such as Steve Keen.
I will update this.
Purpose of this blog
This blog is created to collect the mistakes, errors or outright lies promoted mainly by the blogger "Lord Keynes" on his socialdemocracy21thcentury blog. He often has spreads misinformation which has been thoroughly discredited, mainly to "bolster" keynesians around the world I assume.
Please send me mail at debunkingeconomists@gmail.com for replies and tips.
Please send me mail at debunkingeconomists@gmail.com for replies and tips.
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